Ukraine as an energy hub for Europe
Ukraine is transforming into Europe’s key defense partner and energy hub, sidelining Russia’s traditional dominance.
In a nutshell
- Ukraine is key to Europe’s future security and energy strategy
- Azeri gas to Ukraine offers Europe energy resilience and storage capacity
- Caspian-to-Europe routes would further reduce Russian energy dominance
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The future of relations between Ukraine and the rest of Europe revolves around two main themes: military-industrial cooperation, and the provision of energy and mineral resources for European markets. The outcome on both counts will be determined by how Russia’s war on Ukraine concludes. Although there is much uncertainty, the odds at present are in favor of a scenario where Ukraine not only emerges as the mainstay in Europe’s development of novel high-tech, low-cost weapons, but also crowds out Russia as an energy partner.
From a longer-term geopolitical perspective, the latter may well be the more significant transformation. Much as Ukraine played a key role in the Soviet military-industrial complex, it was an even more important part of the Soviet energy complex. That role may now be considered defunct, and the question is what may come in its place.
Some stranded assets may have residual value
The legacy of the Soviet Union consists of vast infrastructure built to transport energy to European markets. The mainstay was the Druzhba (“Friendship”) pipeline that pumps oil from the “supergiant” fields in western Siberia to Europe. Dating back to the 1960s, it is the world’s longest pipeline, running over 4,000 kilometers. It has a northern spur that proceeds via Belarus to Poland and Germany, and a southern spur that traverses Ukraine to Hungary and Slovakia. Given the overwhelming importance of revenues from oil exports, the Druzhba could be viewed as having been the aorta of the Russian economy.
The role of gas was developed much later and proved considerably more complex. In contrast to the supergiant oil fields, gas is extracted in several locations, requiring a large network of pipelines. There are three main lines that traverse Ukraine. The largest is Bratstvo (“Brotherhood”), which originates in western and northern Siberia. To this was added the Yamal-Europe, which originates on the Yamal Peninsula and transports gas via Belarus into the European Union in Poland and Slovakia. Soyuz (“Union”) pumped gas from Central Asia to Europe. Taken together, the three made up one of the largest gas transmission systems in the world, mainly merging into a single line in western Ukraine for European markets.
Along with the pipelines, Ukraine also inherited vast underground gas storage facilities that allowed reserves to be accumulated during summer and released during winter. The system is the biggest in Europe and the third largest in the world. It consists of 12 facilities that are spread across the country, with five in the east, two in the center and five in the west. The total capacity is 31 billion cubic meters, with the lion’s share located in the west, close to the European markets.
Pipelines as targets and geopolitical tools
Compared to the export of oil, the transit of gas via Ukraine was of minor economic importance. What it did was give Moscow a powerful hold over European energy demand, a hold that has been put to good political use. For example, in 2009 Moscow cut off gas deliveries to Europe via pipelines in Ukraine, and in recent months Russia has been halting gas supplies to Armenia.
At the end of 2024, westward gas flows came to a screeching halt again, though this time it was because Ukraine chose not to renew its gas transit contract with Russia. Although the move triggered loud objections from some countries in Central Europe that have relied heavily on Russian gas imports, Ukraine did not budge.
In August, the situation was complicated further when Ukraine blew up pumping stations on the Druzhba pipeline in Russian territory. The first drone strike was on August 8. After two more attacks, the pipeline carrying oil to Hungary and Slovakia was shut down. It was surely no coincidence that the strikes happened just before the August 15 meeting between United States President Donald Trump and Russian President Vladimir Putin in Alaska.
Facts & figures
Energy routes and assets in Eurasia
Hungary and Slovakia, as the only remaining European buyers of Russian crude oil, lashed out, claiming that the attack on their energy security was “outrageous and unacceptable.” Harsh threats were also issued against Ukraine, including Budapest saying it may halt electricity supplies to Ukraine, where the Russians have devastated the domestic electricity infrastructure. Although the oil flow was partially restored a week later, it is still under serious threat.
The loss of access to Ukrainian energy infrastructure presents Russia with a daunting challenge, which was exacerbated by the September 2022 destruction of the Nord Stream pipelines, built to bring gas to Germany while bypassing Ukraine. There are presently few, if any, viable options for Moscow. While the loss of pipeline access has been somewhat offset by exports of liquefied natural gas (LNG), which remains in demand in Europe, this is not a sustainable option.
The outlook, consequently, must be for a sharp and sustained reduction in Russian export revenues by volume.
Exporting gas through pipelines in other directions is even less promising. In 2023, Gazprom began exporting gas to Central Asia. It did so by reversing the flow in the Central Asia-Center pipeline, which had been the main conduit for the transit of gas from Russia to Europe for decades. On August 2, it was reported that this route had been shut down following a detonation in the Volgograd region.
Gazprom has one operational pipeline to China – the Power of Siberia. At the recent Shanghai Cooperation Organization meeting in Tianjin, it was announced that after many years of tepid interest, Beijing had finally agreed to Russia building a second pipeline to China – the Power of Siberia II. If it happens, which is still uncertain, Russia will become dependent on a single customer known for its hard bargaining, requiring steep discounts. The outlook, consequently, must be for a sharp and sustained reduction in Russian export revenues by volume.
Enter Ukraine as energy service provider to Europe
The looming question is how Ukraine can profit from these developments and the legacy assets. This is where the gas storage facilities come into focus and improving relations between Azerbaijan and Ukraine becomes strategically important.
Before the Russian full-scale invasion, all gas pumped into Ukraine passed through two entry points on the border with Russia and one on the border with Belarus. Since those points are now closed, Ukraine has developed an alternate route via the Balkans. Kyiv now uses the Trans-Balkan Pipeline (TBP) that was originally built to deliver gas from Ukraine to Turkiye but is now severely underutilized. Following the opening of the Blue Stream and TurkStream pipelines, which allow Turkiye to receive gas directly from Russia, the TBP has been transporting gas from TurkStream to countries in the region, including Romania.
TBP’s main importance now is that it could also be used to pump gas from Azerbaijan, via Georgia and the Trans-Anatolian Pipeline (TANAP) that crosses Turkiye, into the Balkans and onwards to Ukraine. At the end of July, Ukraine and Azerbaijan’s state energy companies – Naftogaz and SOCAR, respectively – signed an agreement to import natural gas via that route. The first shipments were received in early August.
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The immediate impact has been to ease Ukrainian concerns about energy and heat supplies as winter approaches. Ukraine now extracts nearly 20 billion cubic meters of gas annually, which is sufficient to cover its own demand for most of the year. However, during winter, it is dependent on imported gas held in storage. Following the Russian bombing campaign on Ukraine’s energy infrastructure, those reserves had dwindled significantly by late summer. The Azeri gas will be helpful in replenishing these vital supplies.
Yet, the opening of links to Azerbaijan is about much more than securing domestic demand. The longer-term implication concerns the potential rise of Ukraine as an energy hub for Europe. Kyiv’s recent offer to allow Baku access to its gas storage facilities was more than a gesture of friendship. It may have been the first step toward developing a new energy service infrastructure serving customers in the EU. Although the initial volumes may be modest, the TBP additionally offers Ukraine and its significant underground storage facilities access to LNG terminals in Greece and Turkiye, as well as to Romanian and potentially Bulgarian offshore production.
Following the recent peace deal between Azerbaijan and Armenia, an additional route may also be opened for shipping both oil and gas from the Caspian Basin to Europe. The key link here is the Zangezur corridor, a 40-kilometer stretch of land that belongs to Armenia and has long separated Azerbaijan proper from its Nakhichevan exclave, wedged between Armenia and Turkiye. If it is developed as an energy corridor, it will provide a shorter route from Baku to Turkiye and onwards to Europe than the current pipelines that pass through politically unstable Georgia.
Scenarios
Least likely: Russia resumes large exports to Europe through pipelines
The least likely scenario is Russia securing an outcome of the war that allows it to resume at least part of its former role as a major energy supplier to customers to its west and south. This could entail reopening the Nord Stream pipelines and resuming energy exports through Ukraine. There are hard constraints in both routes that will be difficult, if not impossible, to overcome. Repairing the Nord Stream pipelines is far from certain as Berlin and Brussels do not want to resume operations of the pipeline, which terminates in Germany. Ukraine’s continued drone attacks on Russia’s Druzhba pipeline and key export terminals, like that at Ust-Luga outside St. Petersburg, and the West’s desire to reduce energy revenues for the Kremlin make this scenario less likely.
More likely (short term): Russia to step up certain intimidation efforts
A more likely short-term scenario is that Russia mounts a campaign to block Azerbaijan’s growing role as an energy supplier for Europe. The recent deterioration in relations between Moscow and Baku has enhanced the willingness of Azerbaijan to support Ukraine, which in turn has prompted Russia to up the ante by striking Azeri assets. On August 6, the Kremlin struck a metering station on the TBP, close to the Romanian border, and two days later, it attacked an oil depot belonging to SOCAR near Odesa. Romania also reported that a shipment of Azeri oil destined for its Petrobrazi refinery had been deliberately contaminated by the injection of organic chloride, which can severely corrode refinery infrastructure.
There is a nuclear option in Moscow’s intimidation playbook: The current flow of oil and gas from the Caspian Basin to Turkiye proceeds via Georgian territory. If Moscow pushes the Russia-friendly government in Tbilisi to shut it down, it will be in full confrontation not only with Europe but also with Azerbaijan and Turkiye. However, Moscow may be wary of such a confrontation.
Most likely (medium term): Russia marginalized in energy markets
The most likely medium-term scenario is that Ukraine prevails largely intact and shuts Russia out of its energy relations with Europe. The driving force is that the EU has long been courting Azerbaijan for increased gas deliveries from the Caspian Basin. The current outlook is for a substantial surge.
If Turkiye proceeds with an expansion of TANAP capacity, it may encourage decisions finally being made to build the envisaged Trans-Caspian Pipeline, which would allow large volumes of gas to flow from Turkmenistan to Europe. The role of Ukraine in this emerging new energy infrastructure would be to offer its gas storage facilities as a stabilizing hub.
The impact on Russia would be compounded if Kazakhstan continues redirecting its oil exports. The historical route is via the Caspian Pipeline Consortium (CPC) that traverses southern Russia to an export terminal at Novorossiysk on the Black Sea coast. The new route, which is already being used, utilizes tankers to transport oil to Baku and then onwards to Turkiye and Europe via pipeline. If this becomes the permanent primary route from Kazakhstan, both the CPC and Novorossiysk will suffer.
Given that the longer-term outcome of this scenario is a total marginalization of Russia’s sway in energy markets to its west, and therefore a sharp decline in its ability to generate export income, it is tempting to believe that Moscow will be ready to play hardball. Yet, if Russia does decide to go down that path, it may discover that taking on Azerbaijan and Turkiye is on a different order than conducting hybrid operations against EU countries.
Russian propagandists recently threatened Baku with a “special military operation” akin to its invasion of Ukraine. The response from Azeri President Ilham Aliyev was to note that his country, which has a close alliance with Turkiye, is ready for war at any moment. The safe bet is that Moscow will back down and have to accept marginalization.
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